Comparing Management and Franchise Agreements

 

our valuation of the management agreement for the new Hungerford Hotel, we determined that the contract had an NPV of $17,110 per room. This is the value of the brand services and of the management services. In our valuation of the franchise fees for the Hillwood Hotel, we determined the franchise had an NPV of $12,216 per room. This is the value of the brand services.

Based on this information about these agreements, create a post that answers the following questions:

1. Is the difference in NPV, roughly $5,000 per room, adequate compensation for the responsibility of operating the property?
2. Is the intellectual property properly valued in each instance?
3. What conclusions can you make about operating a hotel system under franchise agreements vs. under management agreements?

Instructions

SHA616: Valuing Hotel Intellectual Property and Structuring the Capital Stack

School of Hotel Administration, Cornell University

Check: Valuing the Management Agreement

Instructions:

Use this spreadsheet to answer questions about valuing the management agreement for the Hungerford Hotel.

Copyright © 2017 eCornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners.

MFeeValuation

Hotel Management Fee Calculation and Valuation (all figures

000)

Overall Assumptions for Analysis

Operator

(

000)

)

)

Owner’s Priority -$6.6M)

6.0

for Net Basic Fees

10%

(% of SRE Revenues)

10%

Discount Value

Period Value Rate

4,706

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Hotel Revenues

,534

,343

,076

,598

3.25% 3.25% 3.25% 3.25% 3.25% 3.25% 3.25% 3.25% 3.25% 3.25%

8

10%

$6,600 $6,600 $6,600 $6,600 $6,600 $6,600 $6,600 $6,600 $6,600

26.00% 26.00% 26.00% 26.00% 26.00% 26.00% 26.00% 26.00% 26.00% 26.00%

$0

2

16%

Hotel Revenues $ 19,640 $ 23,884 $ 26,115 $ 26,940 $ 27,746 $ 28,534 $ 29,343 $ 30,076 $ 30,830 $ 31,598

2.75% 2.75% 2.75% 2.75% 2.75% 2.75% 2.75% 2.75% 2.75% 2.75%

0

10%

Total Revenues $0

Basic Fee $638 $776 $849 $876 $902 $927 $954 $977 $1,002 $1,027

75% 75% 75% 75% 75% 75% 75% 75% 75% 75%

2

$657

6

6

10%

$0 $30 $31 $31

$34

$0

$27 $27 $28 $29 $29 $30 $31

$0 $54

$58

$63 $64 $67 $69 $553

10%

System Reimbursible Expenses – Costs
System Reimbursible Expenses – Revenues

$657 $718 $741 $763 $785 $807 $827 $848 $869

100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

System Reimbursible Expenses – Costs $540 $657 $718 $741 $763 $785 $807 $827 $848 $869 $7,554 $4,490.61 10% $14.97
Key Money Contribution $0 $0

$0.00

$0 $479

$715

$0

$ 0.019

$1,126

10%

$4,730

16%

$0 $0 $0.00 10%

$0 $0 $0 $0 $0 $0 $0 $0 $0 $0

$5,857

	Overall Assumptions for Analysis
Key Money Contribution																						$0	Base Fee (% of		Hotel Revenues											3.25%
Multiple for Net Base Fees at End of Analysis	Period		6.0	Operating Expenses of Management Company (% of	Basic Fee											75%
Multiple for Incremental Fees at End of Analysis Period	4.5	Incentive Fee (% of CF after									10%											26.00%
Multiple for Net System Reimbursible Expenses at End of Analysis Period	System Reimbursible Expenses as a Percent of	Total Revenues											2.75%
	Discount	Rate			System Reimbursible Expenses – Costs											100%
Discount Rate for Incentive Fees			16%	Number of Shares Outstanding (‘000)	100,000
Discount Rate for Net System Reimbursible Expenses	Number of Rooms	300
Cash		Value
Over Analysis	Present
Annual Flows from Operations	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8	Year 9	Year 10	per Room
A. Hotel Revenues		$ 19,640		$ 23,884		$ 26,115		$ 26,940		$ 27,746		$ 28,534		$ 29,343		$ 30,076		$ 30,830		$ 31,598			$27
B. Hotel GOP before deducting Management Fees	$5,163	$8,129	$ 9,576	$ 9,944	$ 10,279	$ 10,587	$ 10,904	$ 11,154	$ 11,413	$ 11,670	$98,819
C. Annual Debt Service											ERROR:#REF!
Revenues From Management Contract
Base Fee Calculation
$19,640	$23,884	$26,115	$26,940	$27,746		$28			$29			$30	$30,830				$31
Times: Base Fee Percentage
Equals: Base Fee			$63		$776		$849		$876		$902		$927		$954		$977		$1,002		$1,027	$8,928	$5,307.08	$17.69
Incentive Fee Calculation
Adjusted GOP (Line B under “Annual Flows” less Base Fee)	$4,525	$7,353	$8,727	$9,068	$9,377	$9,660	$9,950	$10,177	$10,411	$10,643
Less: Owner’s Priority of $6.6 Million										$6,600
Equals: Cash Flow After Owner’s Priority	($2,075)	$753	$2,127	$2,468	$2,777	$3,060	$3,350	$3,577	$3,811	$4,043
Times: Incentive Fee Percentage
Equals: Incentive Fee	$196		$553		$64	$722	$796	$871	$930	$991	$1,051	$6,751	$2,615.26	$8.72
System Reimbursible Expenses Calculation
Times: SRE Fee Percentage
Equals:	System Reimbursible Expenses – Revenues		$54				$657			$718			$741			$763			$785			$807			$827			$848			$869		$7,554		$4,490.61		$14.97
$1,178	$1,629	$2,120	$2,258	$2,387	$2,508	$2,632	$2,734	$2,841	$2,947	$23,234	$12,412.94	$41.38
Expenses & Costs of Management Contract
Operating Expense Calculation
Times: Operating Expenses as % of Basic Fee
Equals: Operating Overhead		$479		$58	$637		$67		$69		$715	$733	$751	$770	$6,696	$3,980.31	$13.27
Impact Calculation
Total of Base Impacts	$33		$34	$35	$37	$38
Total of Incremental Impacts	$24	$25
Total Impact	$56	$60	$62	$315.77	$1.05
	$540
Times: SRE – Costs as Percentage of SRE Revenues
		$0.00
Total Expenses and Costs	$636	$693	$736	$758	$778	$797	$818	$839	$7,249	$8,786.69	`	$29.29
Net Annual Flows	$700	$993	$1,427	$1,544	$1,651	$1,750	$1,853	$1,937	$2,022	$2,108	$15,985	$3,626.25	$ 12.088
Pre-Tax Earnings Per Share	$ – 0	$ 0.007	$ 0.010	$ 0.014	$ 0.015	$ 0.017	$ 0.018		$ 0.019	$ 0.020	$ 0.021	$ 0.160
End of Analysis Period Valuations
Net Base Fee Value at End of Analysis Period		$1,126	$434.28
Incentive Fee Value at End of Analysis Period		$4,730	$1,072.30
Net System Reimbursible Expenses Value at End of Analysis Period
Total End of Analysis Period Values		$5,857	$1,506.58	$5.02
Total Present Value	Total Present Value and Value per Room	$ 5,132.83	$ 17.109